Expenses-361

Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds

Page 361

back-end load for selling shares that are less than one year old while it charges a 2% back-end load for selling shares that are more than three years old. Mutual funds with back-end loads are also referred to as class B shares.
Level Load — This is an annual fee charged to cover the marketing and distribution (pay out to investors) costs of the fund. The level load is mainly lumped together with the operating expenses of the fund, covered next. As such, many do not consider the level load as a part of the fund’s load, which are mainly one-time fees charged as investors enter and exit a fund.

Expense Ratio — As you can imagine, maintaining a fund costs money on an ongoing basis. This includes salaries, benefits, and payments to the fund manager, analysts, advisers, lawyers, and secretaries, equipment such as computers and telephones, office supplies, property lease for the office, taxes, marketing, postage stamps, etc. All together these expenses are known as operating expenses, and somehow they have to be recovered by the fund. While loads are usually one-time fees, operating expenses are regularly deducted (usually on an annual basis) from the fund’s net assets at a certain percentage rate known as the fund’s expense ratio. The expense ratio is expressed as an annual percentage, but it is usually applied daily based on the fund’s average net assets, just like banks do with interest rates paid on savings accounts or charged on credit cards based on daily balances. Some of the general elements making up the operating expenses of a fund are:
Management Fees — Payments made to the team of people who manage the fund, including the fund manager, advisers, and analysts. 12-b1 Fee — Named after a section of the SEC rules regarding funds, this fee is based on the fund’s marketing and distribution costs. The 12- b1 fee may also include another item known as a service fee, which is used to defray the cost of handling shareholder services such as …

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